Best if printed in landscape.

Our legal system categorizes property into several broad classifications. This section of the course introduces these property categories.

Property Categories

Real property -- the surface of the land, the soil, the minerals within the soil, the airspace above the surface, and items that are part of the land, such as trees.

• The North Dakota Legislature defines real property as "Real or immovable property shall consist of:

  • Land;
  • That which is affixed to land;
  • That which is incidental or appurtenant to land; and
  • That which is immovable by law." N.D.C.C. §47-01-03.

Personal property -- all movable items such as vehicles, books, pencils, clothing, and livestock.

• The North Dakota Legislature defines personal property as "every kind of property that is not real." N.D.C.C. §47-01-07.

Apparently, there are the two major categories of property -- real and personal; that is, if it is not real, it is personal.

Why distinguish between personal property and real property?

• One lender may have the right to seize the borrower's real property if the borrower is unable to pay the loan and another lender may have the right to seize the borrower's personal property. Which lender would be entitled to which items if the borrower is not able to pay the debts?

• A decedent's will may bequeath the real property to one heir and the personal property to another heir. Which heir would be entitled to which items?

• If I sell my land (real property) to you, what goes with it? Are you also buying the buildings, the equipment in the buildings, etc? Which items are considered part of the land and thus transfer to you when you buy the land?

• What other examples can you suggest as to when it is important to distinguish between real property and personal property?

• It is not uncommon, when considering these examples, to suggest that these potential issues could be prevented by carefully specifying at the start of the relationship which items are involved. For example, rather than rely legal definitions (and open ourselves to potential litigation), state in the agreement to buy the land that the buildings are included in the sale but the equipment will remain the property of the seller and will be removed before the buyer takes possession of the land.

• Thinking ahead, anticipating and resolving questions before they become a problem is often the preferred strategy. However, the law (such as distinguishing between real property and personal property) sets the parameters within which we can and must negotiate our agreement. Thus we need to be familiar with these legal concepts so we are prepared to take steps to answer questions before they become a problem or dispute.

Issues that arise in applying the concepts of real and personal property

Although the definitions of real and personal property appear to be relatively simple, issues arise because property can change categories. For example, personal property can become part of real property (a board is used to construct a building) or real property can become personal property (crude oil can be pumped from the ground). This discussion addresses the issues that arises as property transforms from one property category to the other.

Fixture -- personal property that has been attached to the land; e.g. buildings. The individual brick or board was personal property when it was manufactured, but once it is incorporated into the building and the building is considered part of the land (see the definition of real property), the brick or board has become part of the real property.  Clearly, an item can shift between being personal property and real property.

• N.D.C.C. §47-01-05. "Fixtures" defined. -- A thing is deemed to be affixed to land when it is attached to it by roots, as in the case of trees, vines, or shrubs, or imbedded in it, as in the case of walls, or permanently resting upon it, as in the case of buildings, or permanently attached to what is thus permanent, as by means of cement, plaster, nails, bolts, or screws.
• "In determining whether personal property became a fixture under the statute, the court will look into the intention of the persons making the annexation, the manner in which the article or building is annexed, and its adaptation to the use of realty." Gray v. Krieger , 66 ND 115, 262 NW 343.
• Tests to identify fixtures:
  • Annexation -- it is real property if removal of the item will damage the remaining real property
  • Adaptation -- it is real property if the item has been adapted to use on or for purpose of the real estate
  • Intention -- it is real property if the owner of the item intended the item to become part of the real estate
• Examples of fixtures: installed furnace, fences, grain bins? lights? lawn ornament? rugs? display shelves in a retail store?
• Schwend v. Schwend  Montana case addressing whether irrigation pipe is a fixture.

Severed properties -- real property that has been detached from the land; it has become personal property; e.g., cutting a tree and processing it into lumber. A growing tree is real property; the lumber made from the tree is personal property. Somewhere in the process of harvesting the tree, it shifted from being real property to become personal property. At what point does that shift occur?

• For example, where do these different types of growing plants fit into the two categories of real property and personal property? Are they real property or personal property? Why?
  • Natural growing crop, such as native grass growing on range land?
  • Annual growing crop, such as a wheat crop during the spring of the year?
  • Ripen annual crop, such as wheat in August when it is ripe but not yet harvested?
  • Harvested crop, such as the wheat (the grain) in the farmer's bin?

The first category is real; the fourth category is personal. What about the second and third examples? Some legal authorities would say the second example is real and the third example is personal (because in the third example, the mature crop is no longer dependent on the soil). There are other (more recent) legal authorities that suggest even the second example should be considered personal property.  Any thoughts as to why the law would consider a growing crop as personal property? The growing crop is clearly dependent on the soil, so why would the law not consider it part of the real property?

Some thoughts for your consideration: The question of whether a growing crop should be considered personal, rather than real, is an example of "the law reflects our collective social values, and the law changes as those values change" (review the appropriate subsections of Introduction to Agricultural Law).

One hundred years ago, for example, a significant portion of the cost of raising a crop was the land. With all the inputs being used to produce crop today (equipment, fertilizers, herbicides, etc), land is a smaller portion of the cost of producing a crop. In the past if the farmer was unable to pay all the bills, a landowner may have been left unpaid, so the legal system said the crop belongs with the land and landowner: "use the crop to compensate for the unpaid rent." Today if a farmer is unable to pay all the bills, it is likely that an input supplier is left "holding the bag." If the growing crop is considered personal property, would the input supplier have a better opportunity to use the growing crop (once it is harvested) to compensate for the unpaid supplies?

Has our agriculture industry changed? Has our assessment of what is fair changed? Is our law being changed to reflect a change in the agriculture industry that has occurred over the past 40 years?

Bottom line -- the law often is based on much deeper thinking, its justification or purpose may not be immediately obvious, and the underlying values only become clear when the issue is more fully understood.

Property can shift between the two major categories of real and personal -- the growing tree is real property; the lumber is personal property; the board, when used as part of a building, is again part of the real property (that is, it is a fixture).

Our examples of property have been items we can touch -- boards, trees, the soil, a brick, an automobile, and the list goes on. There also are property rights that do not pertain to something we can touch or see.

Intangible property --  (always personal property) -- includes bonds, stock, goodwill, certificate of deposit, an obligation or payment that someone owes you (e.g., N.D.C.C. §47-30.1-01(9)).

• Intangible personal property includes patents, copyrights, and other intellectual properties (such as software, books, music). See titles 17 and 35 of the United States Code.
  • For example, a patent is evidence that the government considers the knowledge or information to be "your idea."
  • Illegally downloading copyrighted music or software is not different than stealing someone's jacket. Copyrighted music is property -- no different than someone's car or cash or clothing.
• "We conclude that a water permit is a general intangible under Section 41-09-06, N.D.C.C., and may be the subject of a valid security interest." Lake Region Credit Union v. Crystal Pure Water, Inc., 502 N.W.2d 524 (N.D. 1993)
• Also consider Plant Variety Protection Act and emerging biotechnology -- do I have ownership in the information/technology that resulted in a modified crop?
  • Required reading: Overview of Biotechnology -- especially the section titled Intellectual Property.
  • As stated on the previous page, an owner can decide which " sticks in the bundle of legal rights" to transfer as part of selling the property.  Is it appropriate to think of a seller of GMO seed who prohibits a purchasing farmer from reusing the seed the following year, as transferring only some legal rights and retaining other legal rights? Is this type of transaction forcing agricultural producers to recognize that purchasing seed will NOT always include all "sticks in the bundle", as the industry had ASSUMED in the past?

• Intangible property is the concept that there are legally enforceable property rights even though there is no physical item.  For example, an idea, an entitlement (an obligation someone owes you), and your reputation are property rights.
  • When I borrow from Bank A to buy a house, my obligation to pay Bank A is a property right that Bank A can "sell" to Bank B. I would now owe my payments to Bank B.
  • My obligation to pay someone (Bank A) is an intangible property right held by that person; a property right that can be transferred to another person (Bank B).
• Understanding the concept of intangible property should help clarify why the law describes property as legal rights, rather than an item.

Summary of Key Points

• You should understand the difference between real and personal property; have an appreciation for the issues arising when an item is shifted between the categories of real and personal property (that is, fixtures and severed properties), and have a sense of intangible property rights.

The next page introduces Estates in Property.

Last updated September 13, 2010

E-Mail agecinf@ndsuext.nodak.edu
Published by Agribusiness and Applied Economics
Morrill Room 217, P.O. Box 5636
North Dakota State University, Fargo, ND 58105-5636
Phone: (701) 231-7441
Fax: (701) 231-7400