What Does Fee Simple Mean?
What is fee simple?
Fee simple is the form of ownership interest that most of us think about when buying land or a home and it is the most common. It is the absolute highest possible ownership interest you can have in real property.
Sometimes we don’t stop to think that there is more than one way to have an interest in real property, but there sure is. We’ve heard terms slung around but their meanings might not be clear, so the best way to get up-to-speed is to start with the origins of fee simple, then look at what it really is.
First there was freehold:
The origins of fee simple interest in real property started across the pond in jolly ‘ole England with the creation of freehold estates. Freehold estates, a type of possessory interest in real property, goes so far back in the day that no one knows for sure when it really began. Before freehold estates, all real property was the sovereign and exclusive dominion of the Crown. In other words, everyone was setting up shop on the monarch’s land.
The term freehold has been historically traced back to King William II - (a.k.a., Guillaume Le Roux), third son of William The Conqueror and known by the folks that liked him as William Rufus. He ran the show from 1087 to 1100 and died after being shot through the lung with an arrow while hunting. Historians disagree as to whether the flying arrow was some reckless moron shooting up the sky, or a more deliberate act.
As a matter of family history, his dad, William the Conqueror was also known as William The Bastard which kind of tells you what kind of cat he was. But William II, his third son, must have been a pretty ok guy because during his reign the feudal subjects of the monarchy (regular folks) began to own land privately for the first time through freeholding.
Fee simple ownership is a form of freehold estate, possessory in nature.
Roots in English Common Law:
The real estate laws we have in place today are rooted in English Common Law. In fact, they are deeply rooted, so the historical review you have been forced through is actually relevant. Let’s look at a hierarchy of terms regarding a fee simple interest held in real property.
How we got to fee simple estates - in 3 easy steps:
Estate – a possessory or non-possessory interest in real property
Freehold Estate – an interest in real property that has no set expiration
Fee Simple Absolute Estate – outright and full ownership interest – the highest possible interest
Types of fee simple estates:
Fee simple absolute – This is the most common form of fee simple and the main subject of our discussion. This estate is the highest possible ownership interest allowed in common law countries like the United States. The owner has a full possessory interest along with the rights and obligations associated with it. You can do anything with the property that is allowed by law, since there are no competing interests.
What would that be? The rights of fee simple ownership include possession, use, enjoyment, control, exclusion, the right to sell, lease, license, mortgage or will it in an estate. But remember, these legal rights may be subject to the additional rights and interests of others so know the content of your deed, title report and the laws that govern the ownership, use and potential future use of your real property!
Just understand that the “absolute” part of fee simple absolute means that with no competing ownership interests you have the full authority to exercise any allowed ownership rights regarding the property, but not the absolute right to do virtually anything you want with it. There are controlling laws after all and also limitations on the deed and title that you need to be fully aware of.
Fee Simple Defeasible:
As in many other areas in real estate, there are sub-categories of fee simple. In this case there are three that fall under a label called Fee Simple Defeasible. This is fee simple ownership where conditions are placed on the Deed.
Types of Fee Simple Defeasible:
Fee simple determinable – interest reverts to the grantor if a conditional event does, or does not, occur. An example would be a condition that requires the property to be used as a farm. If the owner uses the property for another purpose, the property automatically reverts to the grantor.
Fee simple subject to condition subsequent – similar to the above, but the reversion of ownership is not automatic. The grantor has a right to take the property back called the right of reentry, but would have to take deliberate action to exercise that right.
Fee simple subject to executory limitation – If the conditions are not met or are violated, the estate reverts to a third party, not the grantor.
Review:
It’s always a good idea for the real estate investor to understand the glossary of terms of real property ownership. Little things can make a huge difference and this glance at fee simple ownership highlights the point. Estates in land, even fee simple absolute, are subject to taxation, police power, compulsory purchase, escheat and specific encumbrances like covenants that run with the land. These place conditions on the property that affect value, current use and future use. So be mindful as well as knowledgeable.
